Representative APR Explained

14th March 2011

Representative APR is the term for one of the new guidelines that UK financial providers are going to have to adhere to as of Feb 1, 2011. The set of guidelines called the Consumer Credit Directive will have an effect on the advertisements of financial companies, including the way they present their services to the public. A Representative Annual Percentage Rate is one of the new requirements for what must be shown on advertisements.

So what products is this new rule going to apply to? Basically, the directive is going to apply to any advertisements that advertise a loan under £60,000 for consumers. Loans that don't apply include FSA regulated investments, business loans, and agreements that have been secured on land. A few examples of what will apply are credit card advertisements, as well as advertisements for small secured loans and personal loans.

The products that the Representative APR applies to are fairly obvious, but a lot of people are still uncertain as to what exactly a Representative APR actually is.

To start with, it's important to understand that credit card companies will usually charge a different APR to different customers for the same product. They do that because the rates for a credit loan are directly determined by the person's income or credit rating. If you have a better credit rating or a lower income than someone else then you are likely going to pay less than them for your loan rate. Sometimes advertised figures for loans in the UK are fairly misleading, as most of them neglect to mention any annual charges that are also associated with a loan and any balance transfer fees for the credit card.

This new Consumer Credit Regulations directive is meant to help consumers become more informed about what is going to happen with their loan rates. Sometimes you can get hit by unexpected fees that you did not know about from the advertisements you saw, and hopefully this will occur less often now that these new rules are in effect.

The basic definition of Representative APR, as defined by the Department for Business, Skills, and Innovation, is "an APR at or below which the advertiser reasonably expects, at the date on which the advertisement is published, that credit would be provided under at least 51% of the agreements which will be entered into as a result of the advertisement."

To put it a little more simply, what the BSI is saying is that because APR rates can fluctuate so wildly between individual customers, the number that is put on billboards, fliers, and other forms of advertisement must represent the APR rate that the company expects to use on over half, or 51% of the business they get from those advertisements. If they only expect to get 15% of their customers that qualify for the lowest APR rate they offer, they can't advertise that lower rate just to bring in more customers, because in a way it can be very misleading.

This is advantageous because it really helps out consumers who are often pulled into a loan office because of a low rate they saw and then find out that they are going to have to pay nearly twice that advertised rate. Thus, the advertised figure is "representative" of the rates that the majority of their customers will be receiving. Other charges are also taken into account with the Representative APR, including balance transfer fees that were previously never included.

A disadvantage of this new system is that it may lead to slightly higher rates all around, which consumers will have to pay out of their own pockets.